The impact of weather-induced moods on M&A performance
Introduction
Acquirers systematically underperform when merger and acquisitions (M&As) are announced with their performance shaped by the deal, governance and managerial characteristics, amongst other factors (Alexandridis et al., 2017, Tunyi, 2021, Renneboog and Vansteenkiste, 2019, Tuch and O’Sullivan, 2007). Prior studies attribute much of the underperformance to acquiring managers’ over-optimism, hubris and overconfidence, which results in over-payment for their targets (see Renneboog and Vansteenkiste, 2019 for a review). Consequently, acquirers might experience better performance in settings in which over-optimism, hubris and overconfidence are constrained. Drawing from a behavioural perspective (i.e., the literature on weather-induced moods), we explore whether murky, gloomy or unpleasant weather conditions constitute such a setting. To the best of our knowledge, our paper is the first attempt to examine the impact of weather-induced moods on M&A performance.
We build on two important findings from a well-established body of research exploring how the weather (sunlight, rain, wind and cloud cover) affects decision-making, productivity and investments through its influence on moods (e.g., optimism pessimism), risk preferences and activity levels (see, for example, Patel et al., 2020, Shafi and Mohammadi, 2020, Goetzmann et al., 2015, Dehaan et al., 2017, Hirshleifer and Shumway, 2003, Li and Patel, 2021, Kamstra et al., 2003). Firstly, people have better moods and are generally more optimistic when the weather improves. Perhaps, this is more so in the case of the UK, where the weather takes pride of place as one of the most important conversation starters. Secondly, bad weather increases risk aversion through its influence on mood (Bassi et al., 2013, Shafi and Mohammadi, 2020). A study by Shafi and Mohammadi (2020), for example, finds that higher levels of cloud cover – a proxy for worsening investors’ weather-induced moods – leads to a reduction in contributions towards crowdfunding campaigns due to higher risk aversion and increased pessimism.
Given the above findings on the causes of poor M&A performance, we conjecture that M&A performance improves during periods of unpleasant weather as such periods are characterised by negative weather-induced moods, pessimism and risk-aversion. Consistent with this conjecture, we find robust empirical evidence suggesting that UK acquirers earn significantly higher cumulative abnormal returns (CARs) from deals announced in unpleasant weather. Specifically, acquirers earn 1.19% average CARs (-value of 0.000) in the seven days around the deal (CAR[-3,+3]) from deals announced in unpleasant weather but lose (average CARs of −0.72%, -value of 0.061) from all other deals. We discuss our data, empirical tests, findings and robustness tests in the sections that follow.
Section snippets
Data and methodology
We collect M&A and financial data from Thomson Reuters Eikon. Our data covers all M&A deals (valued at $10 million or more) announced by UK listed firms (acquirers) between 1st January 1987 and 31st December 2019 for UK and international public or privately-owned targets. The sample covers all industries and deal types.1 We only retain deals with complete
Results and discussion
We plot acquirer CARs for all firms and the deals announced in different seasons and for low and high temperatures in Fig. 1. Consistent with our conjecture, and outperform other deals. Deals announced in Summer and High-temperature periods perform worse. Importantly, we find that the heterogeneity in returns to acquirers across different seasons and temperature groups are long-lasting and persist over the 26-day event window (CAR[-5,+20]).4
Conclusions
In this study, we conjecture that weather-induced moods influence M&A decisions and outcomes. Specifically, negative weather-induced moods constrain managerial optimism, hubris, overconfidence and the tendency to over-pay for targets, thus resulting in better M&A performance. Using a comprehensive dataset of 3,975 M&A deals announced by UK acquirers between 1987 and 2019, we find robust empirical evidence consistent with our conjecture. More specifically, we find significant heterogeneity in
Acknowledgement
We gratefully acknowledge helpful comments and suggestions from Max Croce (The Editor) and an anonymous reviewer.
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